Posted on 30 Aug 2012 by Neilson
A.M. Best Co. has affirmed the financial strength rating (FSR) of A++ (Superior) and issuer credit rating (ICR) of “aa+” of Tokio Marine and Nichido Fire (TMNF) (Japan). Concurrently, A.M. Best has affirmed the FSR of A+ (Superior) and ICR of “aa-” of TMNF’s subsidiary, Tokio Marine Pacific Insurance Limited (TMPI) (Guam). The outlook for all ratings is stable.
The ratings reflect TMNF’s robust risk-adjusted capitalization, expected improvement in profitability and superior enterprise risk management. TMNF is expected to maintain adequate capitalization in the mid term. The company’s improvement in its profitability is owed to the recovery in its domestic non-life profitability and growing contributions in its consolidated earnings from its overseas businesses. TMNF aims to reduce its combined ratio in the next three years to 95% from 103.3% (in fiscal year 2011), by reducing its loss ratio through favorable rate revisions and improving its operating efficiency, which is partly offset by a conservative budget for catastrophe claims. In addition, TMNF’s well-established overseas businesses in the major insurance markets are expected to boost its profitability. The company continues to reduce its exposure to market risks by selling business-related stocks and enhancing its risk management program in its overseas subsidiaries.
Offsetting rating factors include TMNF’s exposure to natural disasters, deterioration in its capital and surplus in past years and its high dividend payout to its parent company, Tokio Marine Holdings, Inc. Although the risks are diversified across the regions, TMNF is exposed to catastrophe claims such as earthquakes, tsunamis and typhoons, which could result in substantial claims. TMNF saw a decline in its absolute amount of adjusted capital and surplus in the past year due to deteriorating profitability, which was led by the negative impact from lower corporate tax rates and the large scale of claims from natural disasters. Indeed, TMNF, as the core subsidiary of Tokio Marine Holdings Inc., is expected to remain as the key earnings source for the holding company through the dividend payout, although the group slowly diversifies dividend incomes across its subsidiaries.
Downward rating actions could occur if there is an adverse impact on TMNF’s risk-adjusted capitalization due to a material deterioration in its operating performance and/or large-scale occurrences of catastrophe events.
The ratings of TMPI acknowledge its adequate risk-adjusted capitalization, stabilizing underwriting results as well as the explicit support it receives from TMNF. The ratings also acknowledge TMPI’s dominant position in the group accident and health (A&H) sector in Guam, primarily driven by the Government of Guam account.
TMPI’s capital base has recorded substantial increases in the past five years, with its capital and surplus standing at USD 44.79 million at year-end 2011, which almost tripled the amount as at year-end 2007. TMPI’s risk-adjusted capitalization level, as measured by Best’s Capital Adequacy Ratio (BCAR), is supportive of its current ratings and it is expected to remain adequate to support the company’s business growth in the near term.
TMPI’s underwriting performance had been on a deteriorating trend from 2007 to 2010. However, the company has been able to make premium rate corrections quickly on its A&H policies. Since the rate adjustment and coverage modifications in September 2010, TMPI’s loss ratio declined by 4% from its peak in 2010 to 74% in 2011.
TMNF provides financial support to TMPI in the form of a deed of guarantee, catastrophe modeling and reinsurance placements.
Partially offsetting rating factors include TMPI’s relatively low investment yield and its business concentration risk.
TMPI’s investment yield remains at a relatively low level as almost its entire investment portfolio is held in cash or cash equivalents. In 2012, the company started to hold some bond exchange-traded fund investments, which is expected to diversify its investment portfolio and enhance its investment yield going forward.
Given its dominant position in the group A&H sector, TMPI is heavily reliant on this line of business, especially the Government of Guam account. To reduce its business concentration risk and diversify its business portfolio, the company is going to participate in the Federal Government’s employee health program starting in 2013.
Positive rating actions are considered to be unlikely in the near term. Conversely, negative rating actions could occur if there is a material decline in the company’s risk-based capitalization and a deterioration in its operating performance.